The other experts, meanwhile, who use a consistent, historically
predictive, and fully explained methology, estimate that fair
value is around 900-1000, about where we are now. In their view,
stocks are just fairly valued.

So who's right?

In our opinion--and the opinion of one of the smartest money
people we know (also a PhD)--Shiller, Grantham, Smithers, et al.
are right and Siegel is wrong. Our credentialed friend also
examined Siegel's analysis and then explained what he believes is
Siegel's mistake.

Prof Siegel bases his estimate on two variables:

"Trended S&P 500 earnings" of $92

PE of 15

Multiply these together, and you get the 1380 fair value
estimate.

Prof. Siegel's error, it appears, is in using a PE that is too
high.

The 15X average PE for the S&P 500 is what you get when you
use professor Shiller's methodology, which averages 10 years
of trailing earnings (and, therefore, if profit margins are
normal, uses earnings of about 4 years ago). Prof
Siegel's earnings estimate, meanwhile, is a forward
estimate--one that adds about 5 years of trended growth (6% a
year) to the Shiller estimate, but uses the same PE.

We suspect that, if Prof Siegel performed the same "trended"
analysis over the entire 20th Century, the average PE for forward
trended earnings would be about 11X-12X, not 15X. This, we
expect, would produce a fair value estimate much closer to that
of Shiller, Grantham, Smithers, et al. Shiller's PE
analysis is below:

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Jeremy Siegel's Mistake: Why Stocks Are NOT "Dirt Cheap"

Yesterday, we noted that Professor Jeremy Siegel thinks stocks are worth about 40% more than most of his academic brethren do. We ran Siegel's analysis by another PhD, and he explained Siegel's mistake.